One popular strategy for building a retirement fund involves buying good dividend-growth stocks and using the distributions to acquire new shares. This method, known as dividend reinvestment, can significantly enhance your investment returns over time. Bargain hunters have recently started moving back into oversold TSX dividend stocks, but many top TSX dividend payers still look undervalued for a self-directed Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP) portfolio. Among these undervalued gems are Fortis (TSX: FTS) and TC Energy (TSX: TRP), both of which present compelling opportunities for investors seeking stable and growing dividends.
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Fortis (TSX: FTS)
Fortis is a Canadian utility company with a substantial presence across Canada, the United States, and the Caribbean. The company's businesses include power-generation facilities, electric transmission networks, and natural gas distribution utilities. With $68 billion in total assets, Fortis is a major player in the utility sector. Nearly all of its revenue is generated by rate-regulated assets, ensuring reliable and predictable cash flow. This stability makes Fortis a prime candidate for dividend-growth investors.
Fortis is embarking on a $25 billion capital program aimed at boosting the mid-year rate base from $37 billion in 2023 to nearly $50 billion by 2028. This significant investment in infrastructure is expected to drive growth in revenue and cash flow, supporting planned annual dividend increases of at least 4% over this period.
As of the time of writing, Fortis trades near $55.50, off its 12-month low of around $50 but still down from its 2022 high of approximately $65. Despite the price fluctuations, Fortis’ dividend-growth outlook remains strong. The board has increased the dividend for 50 consecutive years, a testament to the company's commitment to returning value to shareholders. Investors purchasing Fortis stock at the current level can secure a dividend yield of 4.25%, making it an attractive option for those seeking steady income.
TC Energy (TSX: TRP)
TC Energy is another top dividend-growth stock that warrants attention. The company is a leading energy infrastructure firm, providing services in natural gas transportation and power generation. TC Energy's extensive pipeline network and strategic projects position it well for future growth.
TC Energy recently completed the $14.5 billion Coastal GasLink pipeline, a project that is expected to transport natural gas from producers to a new liquefied natural gas (LNG) export facility starting in 2025. The company also plans to put $7 billion in new assets into service in 2024. These projects, coupled with TC Energy's disciplined approach to capital allocation, are expected to support ongoing dividend growth.
For 2024, TC Energy raised its dividend by 3.2%, marking the 24th consecutive year of dividend hikes. The company’s focus on getting its balance sheet back in shape, including selling a 40% stake in some American assets for US$3.9 billion and planning to monetize an additional $3 billion in assets this year, underscores its commitment to financial strength and shareholder value.
TC Energy’s stock trades near $53 per share at the time of writing, compared to a 12-month low of around $44. The stock was above $70 in 2022, indicating substantial upside potential. Investors who buy TC Energy at the current level can enjoy a 7.25% dividend yield, making it one of the highest-yielding stocks in the energy infrastructure sector.
Why Dividend-Growth Stocks are Attractive
Dividend-growth stocks like Fortis and TC Energy offer investors the dual benefits of stable income and potential capital appreciation. These companies have a proven track record of increasing their dividends, which can help investors keep pace with inflation and enhance their purchasing power over time.
Utility and energy infrastructure stocks tend to be less volatile than other sectors, providing a defensive element to an investment portfolio. Companies like Fortis and TC Energy generate consistent cash flows from essential services, making them resilient during economic downturns.
Reinvesting dividends to buy additional shares can significantly enhance total returns. This compounding effect can lead to substantial growth in investment value over the long term, particularly for investors who hold these stocks in tax-advantaged accounts like TFSAs or RRSPs.
Investment Considerations
Fortis’ strong balance sheet, extensive asset base, and strategic capital program position it well for long-term growth. The company’s focus on regulated assets ensures predictable revenue, while its commitment to dividend growth provides a reliable income stream for investors.
TC Energy’s strategic projects and disciplined capital management offer significant growth potential. The company’s high dividend yield and consistent dividend increases make it an attractive choice for income-focused investors. Additionally, TC Energy’s efforts to improve its balance sheet and unlock shareholder value through asset sales and spin-offs further enhance its investment appeal.
Fortis and TC Energy stand out as top TSX dividend-growth stocks that still look undervalued. Their reliable and growing dividends, coupled with strategic initiatives and solid financial performance, make them compelling additions to a diversified investment portfolio. Investors seeking stable income and potential capital appreciation should consider these stocks for their self-directed TFSA or RRSP portfolios.
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